THE UNCERTAINTY ABOUT ICOs

11.12.2017 20:23

With blockchain technology irrupting each day more and more in our lives, Initial Coin Offerings (ICO) have been one of the most widely used tenses for those of us merely interested in this new world that’s opening in front of us, and offers millions of opportunities for engineers, economists, programmers and thousands of Jobs in the future. ICOs throughout the last year have increased its use exponentially as a new method of leveraging and financing for new start-ups, mainly those promoted by venture capitalists which are developing new blockchain-based business models. 2017 has been the definitive year for ICO to rise and boom in the market, but they have been launched seriously since 2015, when their market capitalization in contrast to traditional IPO was merely a joke, and each ICO was inferior to one million dollars.

One case that clearly broke the trend was that of DAO (Decentralized Autonomous Organization) was a Smart contracts system that based its value on Ethereum, functioning as a fund and crowdfunding Project at the same time, recruiting more than 150 million dollars in less than a month, 28 days to be precise. The DAO was completely decentralized, so it didn’t have a registered owner, as Ethers Will be send from all over the world and Will be converted into tokens through DAO’s ICO within a smart contract process. Everything was developing perfectly and Ether was booming, until DAO was hacked and the whole system fell down and funds were obviously subtracted, which caused the SEC (Securities Exchange Commission) to study the case, and categorize DAO’s tokens as securities, which submitted them to an entire burden of regulations and bureaucratic obstacles, which could affect similar launchings of ICOs in the future. In the last year 2017 we have been able to observe how the funding raised by new ICO was in the consecutive months from April forwards of $103M, $232M, $462M and $574M in July. This increase in funding is because the new crowdfunding model has been understood by much more investors, that instead of going to a venture capital or looking to issuing new equity decided to develop financial products based on blockchain and issue tokens through an ICO. ICO can be compared to crowdfunding, but instead of selling shares of equity, buyers or investors are given tokens, which normally are indexed or based their value partially in a cryptocurrency as Bitcoin or Ether.

As previously mentioned, many new ICO after DAO’s events, are catalogued as securities by the SEC, as they don’t offer ownership of the company under shares or any type of venture. This is because tokens have a utility which is having Access to a secondary market which allows buyers and Sellers to interact and determine the Price of that token which is being used to capitalize the firm without giving rights of ownership and consequently of decision to those token-holders. Ethereum platform itself emits a token called the “Ether” which is used to cover all costs of blockchain transactions and Smart contract operations effectuated through the system, offering customers at the same type the option of revaluing their token in the secondary market, expecting that some other investor Will take it out of their hands. All this process put in a global scale it what has caused Ether to become a stable and viable cryptocurrency, being the second one with the greatest market capitalization after Bitcoin.

On the other hand, there’s another Branch of tokens which are being released nowadays through ICO in contrast to “utility tokens”, which is what I have previously explained. These new tokens being issued in ICO are called “registered securities offerings”, meaning that this type of tokens may include equity or some King of dividend or direct return over the equity for shareholders, without forcing by law the issuers to offer investors who possess equity a vote in the firm. These new laws and amendments surrounding blockchain are showing how imposing a wider regulation while opening the market helps to protect investors in blockchain processes, while preventing to hamper innovation and destroy development, by leaving aside over-regulation which usually the SEC loves.

The issuing of new ICOs is growing exponentially, primarily driven by the rise in value of cryptocurrencies. Bitcoin has revalued a 7,407% reaching over $10,000 this week. This great increase in value has caused Bitcoin to be the cryptocurrency to which most of the ICOs are linked, which has benefited both, holders of Bitcoin and enterprises willing to revalue their tokens in order to attract a larger number of investors. Ether has also 100-folded since mid-2015. This has been because Ether is used as the main token for the whole system of Ethereum, and Smart contracts have widely developed throughout the last two years due to the lower costs and greater efficiency they offer in contrast to usual legal procedures, and as firms have gained confidence with this system, demand has shifted towards smart contracts. Investors who trusted cryptocurrencies and the whole blockchain system have seen their opinion reinforced by this boom in value, which has made them able to diversify their investments into several ICOs instead of having it all in the same cryptocurrency or token, which has been one of the main reason of the generalized exponential growth of ICOs.

But why has this movement towards blockchain and tokenization occurred? We have been able to see how thousands of firms and entrepreneurs adopted new blockchain-based models. This is because firms instead of centralizing all their data in expensive structures and models, have decided that it was time for development and innovation to disrupt their business models and have trusted blockchain systems of data management and decentralized models to make their enterprise expand due to lower costs and greater efficiency in terms of data and security. Blockchain is developing and it is the future, and many start-ups and firms with long term vision have decided to not let this train pass. We, blockchain supporters are not asking everybody to jump into the train, but at least to not put stones in the railways. Let people and firms be free.

Lastly, we have been able to hear several analysts and economists say that “the whole system of blockchain and all cryptocurrencies involved in it are a bubble”. There’s an easy answer to that proposition, and while bubbles are normally just expanded and inflated by greedy speculators, Bitcoin and blockchain have an actual entire system running under their commands, and millions of firms have chosen to depend on this system, not because of greed but due to the immense number of facilities it offers through decentralization of value and data. Everybody supported the idea that railways were a bubble at first in the XIX century, and the internet was also declared by several analysts and trend economists of the moment as being a “clear bubble” and hyper inflated. These two examples have shown all along history that excitement caused by innovation and development don’t necessarily has to cause bubbles, and that innovation and technological development can reach even the wildest expectations.

“We believe that the economy works best when it works for everyone,"- Don Tapscott